Friday, 11 January 2013

Mint Condition

What's going on with the debt ceiling and this platinum coin thing?Paul Krugman has anice article in the Times today highlighting both the political context and economic realities surrounding the debt ceiling and the very strange loophole to circumvent the very unnecessary political posturing. Here's the political bit:Where does the debt ceiling fit into all this? Actually, it doesn’t. Since Congress already determines revenue and spending, and hence the amount the Treasury needs to borrow, we shouldn’t need another vote empowering that borrowing. But for historical reasons any increase in federal debt must be approved by yet another vote. And now Republicans in the House are threatening to deny that approval unless President Obama makes major policy concessions.Just consider the vileness of that G.O.P. threat. If we were to hit the debt ceiling, the U.S. government would end up defaulting on many of its obligations. This would have disastrous effects on financial markets, the economy, and our standing in the world. Yet Republicans are threatening to trigger this disaster unless they get spending cuts that they weren’t able to enact through normal, Constitutional means.This is the political context that we're operating in—recurring games of chicken that just about everyone is tired of. But, the Republicans are looking for leverage where ever they can find it, and they don't seem to be concerned about the damage that it's doing to their Party, the country, or—as they constantly remind us—the children, dear, the children. Moreover, they continually justify these games by stating very genuinely that the long-term consequences of our economic situation far outweigh the short-term consequences of these relatively minor actions. Again, sensible, pragmatic Republican's at work.Whether this is right or wrong is entirely besides the point. This is the situation we're in. We're forced to play the game, so how do we end it as soon as possible?Answer: the 1 trillion dollar platinum coin. Here's Krugman:

Here’s how it would work: The Treasury would mint a platinum coin with a face value of $1 trillion (or many coins with smaller values; it doesn’t really matter). This coin would immediately be deposited at the Federal Reserve, which would credit the sum to the government’s account. And the government could then write checks against that account, continuing normal operations without issuing new debt.

In case you’re wondering, no, this wouldn’t be an inflationary exercise in printing money...the Fed could and would offset the Treasury’s cash withdrawals by selling other assets or borrowing more from banks, so that in reality the U.S. government as a whole (which includes the Fed) would continue to engage in normal borrowing. Basically, this would just be an accounting trick, but that’s a good thing. The debt ceiling is a case of accounting nonsense gone malignant; using an accounting trick to negate it is entirely appropriate.

So why isn't it inflationary? It certainly seems like printing money. More money chasing a fixed number of goods equals inflation, no? Supply and demand, right? Etc. Etc. Etc. Here's a blog post to The Everyday Economist, arguing that the coin would indeed be inflationary. When I read this, a line from Lester Thurlow and Robert Heilbroner that I read way back echoed in my head: "The specter of inflation has to be looked at knowingly." Compare The Everyday Economist to a blog post by Krugman.

But what if the Fed decided not to shrink its outside balance sheet? Even so, under current conditions it would make no difference — because we’re in a liquidity trap, with market interest rates on short-term federal debt near zero. Under these conditions, issuing short-term debt and just “printing money” (actually, crediting banks with additional reserves that they can convert into paper cash if they choose) are completely equivalent in their effect, so even huge increases in the monetary base (reserves plus cash) aren’t inflationary at all.

And if you’re tempted to deny this diagnosis, I have to ask, what would it take to convince you? The other side of this debate has been predicting runaway inflation for more than four years, as the monetary base has tripled. The same people predicted soaring interest rates from government borrowing. Meanwhile, the liquidity-trap people like me predicted what would actually happen: low inflation and low rates. This has to be the most decisive real-world test of opposing theories ever.

When this argument is posited to the pundits (the questionably qualified) on the cable news shows, they usually fire back with a more visceral question: Is this gimmick worthy of the US? Is a quick fix solution not below us? I'm sorry to go so heavy on Krugman in this one, but he might just have the best answer to this that I can imagine:

Here’s how to think about that: we have a situation in which a terrorist may be about to walk into a crowded room and threaten to blow up a bomb he’s holding. It turns out, however, that the Secret Service has figured out a way to disarm this maniac — a way that for some reason will require that the Secretary of the Treasury briefly wear a clown suit. (My fictional plotting skills have let me down, but there has to be some way to work this in). And the response of the nervous Nellies is, “My god, we can’t dress the secretary up as a clown!” Even when it will make him a hero who saves the day?